Mutual Assistance in Collection of Tax: South Africa and Australia

South Africa and Australia concluded a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains on 1 July 1999. The agreement was subsequently amended by way of a Protocol signed on 31 March 2008. The agreement and the Protocol were entered into by the South African government in terms of section 108(2) of the Income Tax Act, No 58 of 1962, as amended (“the Act”) read with section 231(4) of the Constitution of the Republic of South Africa. The Protocol was duly published in the Government Gazette on 23 December 2008. Article 25A which deals with the mutual assistance in the collection of taxes took effect from 1 July 2010.

South Africa and Australia concluded a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains on 1 July 1999. 

The amendments to the treaty concluded by South Africa and Australia by way of the Protocol referred to above deal with, inter alia, the exchange of information regulated by article 25 and with mutual assistance in the collection of taxes which is catered for in article 25A.

Article 25A of the treaty provides that the South African Revenue Service (“SARS”) and the Australian Tax Office (“ATO”) shall assist each other in the collection of taxes. Article 25A provides that the competent authorities of South Africa and Australia, may, by mutual agreement settle the mode of application of article 25A.

Article 25A refers to any amounts owed in respect of taxes of every kind and description imposed on behalf of South Africa and Australia or of their political subdivisions or local authorities, so long as the taxation in question is not contrary to the tax treaty or any other instrument to which the two countries are parties, as well as interest, administrative penalties and the cost of collection or conservancy relating to such tax.

The tax treaty provides that, where a tax debt is enforceable under the laws of South Africa, and is owed by a person who cannot under the laws of South Africa prevent its collection, that tax debt shall at the request of the Commissioner: SARS be accepted for purposes of collection by the competent authority of Australia. 

Similarly, the ATO is empowered to request that the Commissioner: SARS assists the ATO in collecting tax due to Australia.

Article 25A(3) has the result that the tax debt shall be collected by SARS in accordance with the provisions of South African law applicable to the enforcement in collection of taxes as if the debt were an amount due to SARS. The treaty also requires Australia to assist South Africa in collecting tax due by South African taxpayers from assets they may have in Australia. Prior to the insertion of article 25A into the tax treaty, SARS was unable to assist the ATO in the collection of taxes due to it from assets of Australian taxpayers located in South Africa and similarly, the ATO was unable to assist SARS in recovering taxes due to SARS from assets located in Australia belonging to South African taxpayers.

The application of an article regulating mutual assistance in the collection of taxes under a tax treaty was considered in the United Kingdom’s Court of Appeal in the case of Ben Nevis (Holdings) Ltd & Anor v Commissioner for HM Revenue and Customs [2013] EWCA Civ 578. In that case the United Kingdom court held that article 25A of the tax treaty concluded between South Africa and United Kingdom was valid and applied to the tax debts in issue in that case.

More recently, the North Gauteng High Court was required to finalise a provisional preservation order in terms of the provisions of section 163 of the Tax Administration Act, No 28 of 2011 (“TAA”) which related to a request made by the ATO to SARS to assist in the collection of tax due by an Australian taxpayer out of assets located in South Africa.

During January 2012, that is, before the Tax Administration Act took effect, SARS received a request from the ATO for assistance with tax collection and conservancy of the assets of Mr Krok pending collection of the amount which was alleged to be due by him under the tax laws of Australia. Subsequently, this request was renewed by the ATO during February 2013, which is after the Tax Administration Act took effect. The request made by the ATO was accompanied by a formal certificate issued by the Australian Commissioner indicating that Mr Krok was liable to the ATO in the amount of R235,705,169.19. SARS agreed to assist the ATO in accordance with the Protocol to the tax treaty concluded between South Africa and Australia and particularly article 25A.

Section 185 of the TAA sets out the process which SARS must adhere to where a request has been received from a foreign government, in terms of a tax treaty, to assist in the recovery of tax payable to that government. As a result of SARS being requested by the ATO to assist in the collection of tax allegedly due by Mr Krok, SARS applied for an order for the preservation of Mr Krok’s assets in accordance with section 163 of the TAA. 

Fabricius J delivering judgment in the Krok case referred to a Memorandum of Understanding between the two competent authorities of South Africa and Australia concerning assistance in the collection of taxes under article 25A of the treaty in place between the two countries. It does not appear that SARS has published this Memorandum of Understanding for use by taxpayers and it is interesting to note that in the Ben Nevis case the English Court expressed reservations about that the fact that there appeared to be documents in existence setting out the practical application of the tax treaty concluded by South Africa and United Kingdom which had not been made available to taxpayers in either country.

Mr Krok’s counsel contended that on a proper interpretation of the double tax agreement between South Africa and Australia and indeed the Protocol that SARS and the ATO could only rely on the mutual assistance provisions in respect of taxes owing which arose during the income years commencing from 1 July 2009. It was therefore argued that the taxes claimed by the ATO from Mr Krok fell outside of the scope of article 25A of the treaty. 

Similar arguments were raised in the Ben Nevis case and that was dismissed by the English Court. Similarly, in South Africa the High Court reached the conclusion that article 25A could be invoked from the date on which it took effect in respect of taxes which might have arisen since inception of the underlying tax treaty, that is during 1999.

The Court also examined the structure created by Mr Krok and related entities pursuant to his emigration from South Africa and the manner in which those structures were implemented. The Court was satisfied that the assets in issue remained under the control of Mr Krok and therefore confirmed the provisional preservation order sought by SARS in order assist the ATO in the collection of taxes due my Mr Krok.

Thus, taxpayers who have assets located in multiple jurisdictions need to be aware that should they not settle their tax liabilities payable to the tax authority where they reside, that tax authority may seek assistance from other revenue authorities around the world to assist in the collection of tax under double taxation agreements.

In addition, many countries have assented to the Multilateral Convention on Mutual Administrative Assistance on Tax Matters, as amended by the Protocol (“the Convention”). On 21 February 2014, Government Gazette 37332, indicated that all constitutional formalities required to give effect to the Convention had been finalised and that the Convention would take effect in South Africa from 1 March 2014. 

Currently there are 64 countries which have adopted the Convention and are in the process of finalising assent thereto in terms of domestic constitutional requirements. This means that South Africa can request assistance from numerous countries in collecting taxes payable by South African residents with assets located in countries which have assented to the Convention. Similarly, various other countries can call on South Africa to assist in the collection of taxes due to those other countries. 

Historically, it was possible for a taxpayer to argue that it was not legally competent for one government to assist another government in the collection of taxes due to that other government as it undermined the principle which recognised the sovereignty of nations. 

Those principles have changed by virtue of the inclusion of mutual assistance articles in numerous double taxation agreements and indeed in the Convention referred to above.

DR BERIC CROOME Tax Executive Edward Nathan Sonnenbergs Inc. This article was first published in Business Day, Business Law & Tax Review (March 2013). All information was correct at date of publication.

Tax Evaders Find it Difficult to Hide Across Borders

South Africa and the United Kingdom concluded a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains, which was gazetted in Government Gazette 24335 of 31 January 2003.  That agreement was subsequently amended by Government Notice 52 in Government Gazette 34971 on 2 February 2012 with effect from 13 October 2011.

The amendments to the treaty concluded by South Africa and the United Kingdom dealt with, inter alia, the exchange of information regulated by article 25 and article 25A dealing with assistance in the collection of taxes.

SARS  and  UK  revenue   can assist in targeting 

tax debtors in each other's countries

Article 25A of the treaty provides that the South African Revenue Service (‘SARS’) and Her Majesty’s Revenue and Customs (‘HMRC’) shall assist each other in the collection of taxes.

Article 25A refers to any amount owed in respect of taxes of every kind and description imposed on behalf of South Africa and the United Kingdom or of their political subdivisions or local authorities, so long as the taxation in question is not contrary to the tax treaty or any other instrument to which the two countries are parties, as well as interest, administrative penalties and the cost of collection or conversancy related to such tax.

The treaty provides that, where a tax debt is enforceable under the laws of South Africa, and is owed by a person who cannot under the laws of South Africa prevent its collection, that tax debt shall, at the request of the Commissioner: South African Revenue Service be accepted for purposes of collection by the competent authority of the United Kingdom.  Article 25A(3) provides that the tax debt shall be collected by the United Kingdom in accordance with the provisions of its laws applicable to the enforcement and collection of its own taxes, as if that debt were an amount due to the United Kingdom.  The treaty also requires South Africa to assist the United Kingdom in collecting tax debts due by United Kingdom taxpayers from assets they may have in South Africa.

Before the insertion of article 25A into the tax treaty, SARS was unable to assist HMRC in the collection of taxes due to it from assets of United Kingdom taxpayers located in South Africa  and, similarly, HMRC was unable to assist SARS in recovering taxes due to SARS from assets located in the United Kingdom belonging to South African taxpayers.  The question that did arise at the time that the article was inserted into the treaty, was whether the assistance in the collection of taxes could apply to taxes which arose prior to the insertion of the article into the tax treaty.

This question was considered in the United Kingdom’s Court of Appeal in the case of Ben Nevis (Holdings) Ltd and Anor v Commissioner for HM Revenue and Customs [2013] EWCA Civ 578.  Ben Nevis is a company incorporated in the British Virgin Islands, which was owned and controlled by a Mr David King and/or his trustees.  The judgment indicates that Ben Nevis is liable to the Commissioner: SARS for taxes from the 1998 to the 2000 years of assessment amounting to approximately R2,6 billion following the final determination of a tax appeal in October 2010.  Subsequently, judgment was taken against Ben Nevis in proceedings in the courts in South Africa.

SARS took the view that, when Mr King became aware that SARS was investigating Ben Nevis’ tax affairs, he transferred Ben Nevis’ assets to another company incorporated in British Virgin Islands, and that, as a result thereof, funds of approximately £7,8 million had been credited to a bank account in London in the name of Metlika Trading Limited.

As a result of the protocol amending the tax treaty between South Africa and the United Kingdom taking effect on 13 October 2011, which now, for the first time, allowed for mutual assistance in the collection of taxes, a request was made by SARS to HMRC that it assist SARS in the collection of the tax debt due.

The High Court in the United Kingdom had previously dismissed Ben Nevis’ application to set aside the order granting judgment against Ben Nevis in respect of the tax due to SARS.

Historically, the courts in the United Kingdom have declined the request to entertain claims for the enforcement of revenue or other public laws of a foreign state.  This flows from the well-established principle that the courts of one country will not enforce the revenue laws of another country.  However, this principle has been watered down as a result of international agreements concluded by various governments, and, particularly, the Joint Convention on Mutual Administrative Assistance in Tax Matters, which include a provision for assistance in the recovery of taxes.

Originally, as pointed out above, the tax treaty concluded by South Africa and the United Kingdom did not contain any provision for mutual assistance in the collection of taxes.  Article 25A was inserted by virtue of the protocol conclude by the two governments, with effect from 13^th October 2011.

Ben Nevis sought to argue that article 25A of the tax treaty could not apply  as a result of the fact that the tax debts were due in respect of years of assessment commencing prior to the coming into force of the 2002 convention concluded by South Africa and the United Kingdom.  Thus, Ben Nevis sought to argue that the effect of article 25A and article 27 of the 2002 convention limited the scope of article 25A to tax debts on or after 1 January 2003.  The tax owed by Ben Nevis related to the 1998 to 2000 assessments, that is, prior to the 2002 convention and most certainly prior to the date on which article 25A was inserted into the tax treaty concluded between South Africa and the United Kingdom.

Lord Justice Lloyd Jones reviewed various cases dealing with the interpretation of international agreements and also the relevant articles of the Vienna Convention on Treaties and considered the retrospective effect of article 25A.

The Court also referred to a memorandum of understanding that was agreed to by South Africa and the United Kingdom and criticised the fact such memorandum could only be obtained by taxpayers by making a Freedom of Information Act request.  The Court, therefore, expressed the view that it is in the interest of fairness to taxpayers that memoranda of understanding agreed by contracting states should be readily available to the public.

The Court reached the conclusion that the application of article 25A to a request for assistance in the enforcement of tax debts arising before the protocol came into effect did not amount to retrospective application, nor was it unfair that the protocol should apply to such pre-existing tax liabilities.  The Court also considered the effect of the Finance Act of 2006, and whether that Act permitted HMRC to conclude an agreement with another country such that mutual assistance in the collection of tax debt should apply retrospectively.

At the end of the day, the Court decided that the presumption against retrospective effect did not apply to Ben Nevis, because the application of article 25A in respect of taxes arising before 19 July 2006, that is, the date on which the relevant provisions of the Finance Act took effect, or 1 January 2003, did not involve any objectionable retrospective effect.  The Court accordingly decided that article 25A could be utilised by HMRC in assisting SARS in recovering tax liabilities which arose prior to the insertion of article 25A into the tax treaty concluded by South Africa and the United Kingdom.

It is interesting to note that the tax treaty concluded by South Africa and Australia contains a similar provision dealing with the assistance in the collection of taxes at article 25A which appeared in Government Gazette 31721 of 23 December 2008.  The press has reported that Mr Tannenbaum, the alleged mastermind of a Ponzi scheme, is indebted to SARS in the amount of R747,990,921.00.  Mr Tannenbaum would appear to currently reside in Australia, and, when reference is made to the decision in the Ben Nevis case, it is more than likely that SARS will seek assistance from the Australian Tax Office to recover the taxes due as a result of the alleged Ponzi by relying on article 25A of the treaty concluded by South Africa and Australia.

Previously, tax treaties did not envisage countries assisting each other in the collection of tax debts, but this has changed, and the OECD’s Model Convention now contains such provisions. Furthermore, the Joint Convention on Mutual Administrative Assistance in Tax Matters includes a provision for the assistance in recovery of taxes.  

Thus, governments will assist each other in recovering taxes due by taxpayers of other countries from assets that those taxpayers may have in the other country.

■ Dr Beric Croome is a tax executive at ENS. This article first appeared in Business Day, Business Law and Tax Review, July 2013.